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Commentary: Debt-Exchange Offers Get a New Lease on Life with Marblegate Decision

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January 26, 2017

 
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NEWS AND ANALYSIS

Commentary: Debt-Exchange Offers Get a New Lease on Life with Marblegate Decision

In its decision on Jan. 17 in Marblegate Asset Management LLC v. Education Management Finance Corp., the U.S. Court of Appeals for the Second Circuit put an end to the idea that some extreme moves done in connection with exchange offers might raise a valid claim under the Trust Indenture Act (TIA), according to a commentary by Prof. Stephen J. Lubben in the New York Times DealBook blog on Friday. The case involved a company that could not file for bankruptcy without destroying its business. So instead it adopted a very aggressive out-of-court restructuring plan. The company had both secured and unsecured debt outstanding and was teetering on the brink of breaching its obligations under the former. The company and a large number of its creditors came up with a plan to sell all of the company’s assets to a new subsidiary. Those who consented to the plan would receive new securities in the new subsidiary. While in this case nonconsenting secured creditors would still receive debt in the new subsidiary, that debt would be junior to the debt of consenting secured creditors. And nonconsenting unsecured bondholders would not receive anything from the new company. The trial judge said this went far enough to raise concerns under the TIA, because there was no real likelihood that the dissenting bondholders were going to get paid after the dust settled on this deal. The bonds were still outstanding, but the companies that were obliged to pay them no longer had any assets. The appeals court, with one dissent, said that the TIA covered only changes to the core terms of the bonds. None of those core terms were changed in this little scheme, so there was no issue under the act — which means that the restructuring advisers can go back to being cunning about designing new and ever more forcible exchange offers. And bondholders who want real protection from that need to think about getting that protection in the form of real covenants in the bond indenture.
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The Second Circuit in its Marblegate decision cited  an article in the forthcoming edition of the ABI Law Review (see p. 32).
To preview the article, please click here.

What is at stake in the Marblegate case? Click here to read ABI Editor-at-Large Bill Rochelle's analysis from last week.

Mall Owners Rush to Get Out of the Mall Business

Mall landlords are increasingly walking away from struggling properties, leaving creditors in a lurch and posing a threat to the values of nearby real estate, according to a Wall Street Journal analysis. As competition from online retailers batters store owners, some of the largest U.S. landlords are calculating that it is more advantageous to hand over ownership to lenders than to attempt to restructure debts on properties with darkening outlooks. That, in turn, leaves lenders with little choice but to unload the distressed properties at fire-sale prices. In the period from January to November 2016, 314 loans secured by retail property — totaling about $3.5 billion — were liquidated, 11 percent more loans than in the same period a year earlier, according to data from Morningstar Credit Ratings. The liquidations resulted in a loss of $1.68 billion.
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Analysis: Retailers Chasing Fast Fashion Stumble Under Heavy Buyout Debts

“Euro fast fashion,” featuring trendy clothing that can move from catwalks to stores in mere weeks, has taken the U.S. by storm, and distressed specialty apparel retailers are among the biggest casualties, Bloomberg News reported yesterday. Moody’s Investors Service lists 18 retail and apparel names as “very high credit risk.” That’s “the highest number I can remember since certainly the recession, and I don’t recall us getting to that level even then,” said Moody’s analyst Charles O’Shea. Besides fast fashion, traditional chains are being hurt by the quickening shift to online shopping. Younger shoppers have gravitated to fast-fashion brands not only because they’re more affordable, but also because they’re able to quickly capture the latest looks and make them available in a fraction of the time traditional merchants need. Cheaper prices also mean that customers of these brands, sometimes referred to as disposable fashion, have come to expect an ever-changing assortment. The most immediate risk is for chains that are smaller, highly leveraged and often private equity-owned, Greenhill’s Grubb said. J. Crew, Claire’s Stores Inc., Gymboree Corp., Rue21 Inc. and True Religion Apparel Inc., the five most troubled companies on S&P’s list of retailers on negative outlook, all fit that profile, with credit ratings deep in junk territory.
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Study: Most Small Businesses Create Fewer than One New Job a Year

Employment growth is slow and unsteady at most small firms, with the median small business adding fewer than one full-time position a year, despite the sector’s reputation as an engine of U.S. job growth, the Wall Street Journal reported on Friday. About 16 percent of small firms lost the equivalent of one full-time employee and just 20% added more than two full-time positions, according a new study by the JPMorgan Chase & Co. Institute, which analyzed 2015 payroll records for more than 45,000 small firms that are bank customers. The study highlights the continuing economic challenges facing many small businesses. Most small firms employ just a few workers and struggle with unpredictable results. The lion’s share of small-business job gains in the U.S. comes from new businesses being formed, rather than the expansion of older small firms. “There is a great disconnect between the belief that entrepreneurship in general is a driver of economic growth and prosperity, and the simple fact that most small businesses remain small,” said Scott Stern, a professor at the Massachusetts Institute of Technology who studies entrepreneurship.
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BLOG EXCHANGE

New on ABI’s Bankruptcy Blog Exchange: Third-Party Funder Subrogated to IP’s Right to Payment of Fees

The availability of the remedy of subrogation has been explored at length by the courts recently, according to a recent blog post. The leading authority of Bank of Cyprus Limited v. Melenaou is thought to be the first of its kind where a lender has been entitled to be subrogated to an unpaid vendor’s lien where the lender did not advance funds for the purchase of the property.

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